Topic 3 - The Wall Street Crash

Question 1

Identify three causes of the Wall Street Crash (October 1929).

Answer 1

1. Speculation
2. Overproduction
3. Lack of an export market

Question 2

What was speculation?

Answer 2

The practice of buying shares with the confidence that they can be sold for a profit once prices have risen.

Question 3

What did it mean to “buy on the margin”?

Answer 3

Shareholders borrowed up to 90% of the share price from the bank.

Question 4

How much did American banks lend for speculating in 1929?

Answer 4

$9 billion

Question 5

What impact did speculation have on share prices?

Answer 5

More and more people bought shares, which caused share prices to rise artificially high (above the value of the business).

Question 6

What belief drove speculation and the buying of shares in the 1920s?

Answer 6

The confidence that share prices would continue to rise.

Question 7

Why did shareholders begin to sell shares at rapid rates in October 1929?

Answer 7

They lost confidence in the American economy and did not believe they would continue to make money on shares.

Question 8

Why did speculation cause the Wall Street Crash?

Answer 8

Speculation drove prices to an artificially high level →

Shareholders realised that their shares were worth more than the value of the business they had invested in →

Shareholders lost confidence in the value of their shares and began selling their shares as fast as possible →

Share prices fell dramatically and people sold shares at a fraction of what they had bought them for →

Many were unable to pay back their loans, which caused businesses, banks and investors to become bankrupt.

Question 9

What is overproduction?

Answer 9

Producing more goods than is wanted or needed (exceeding demand)

Question 10

What had happened to production levels in the late-1920s?

Answer 10

American industries were producing too many goods and there was not enough demand from the American people to sell the goods.

Question 11

How many cars were produced in 1929, and why was this problematic?

Answer 11

4.5 million cars were produced, even though one fifth of Americans already owned a car.

Question 12

What proportion of American people lived below the poverty line and could not afford consumer goods?

Answer 12

60%

Question 13

Why was demand for consumer goods low by the late-1920s? (Identify two reasons)

Answer 13

1. Many Americans had already bought the consumer goods they wanted.
2. Many Americans were living in poverty and could not afford consumer goods.

Question 14

Why did overproduction cause the Wall Street Crash?

Answer 14

Fall in demand for American goods →

Lower prices and lower profits for companies →

Shareholders lost confidence in the value of their shares and began selling their shares as fast as possible →

Share prices fell dramatically and people sold shares at a fraction of what they had bought them for →

Many were unable to pay back their loans, which caused businesses, banks and investors to become bankrupt.

Question 15

What is a tariff?

Answer 15

A tax on imported goods, which makes them more expensive.

Question 16

Why did other countries place tariffs on American goods in the 1920s?

Answer 16

They retaliated against the high tariffs that Republican governments had placed on foreign imports in the 1920s (e.g. 1922 Fordney-McCumber Tariff Act), which had made the demand for foreign goods drop as they were more expensive.

Question 17

What was the consequence of the tariffs placed on American goods?

Answer 17

American goods became more expensive abroad, which caused a drop in demand for American goods abroad. This worsened the problem of overproduction.

Question 18

Why did the lack of an export market cause the Wall Street Crash?

Answer 18

This worsened the problem of overproduction and limited the growth of the US economy →

Shareholders lost confidence in the value of their shares and began selling their shares as fast as possible →

Share prices fell dramatically and people sold shares at a fraction of what they had bought them for →

Many were unable to pay back their loans, which caused businesses, banks and investors to become bankrupt.

Question 19

Describe the events of the Wall Street Crash (October 1929).

Answer 19

October 13-17, 1929: The stock market began to grow unstable – investors began to sell shares, causing prices dropping sharply.

October 24, 1929 (“Black Thursday”): Panic selling continued. However, the biggest banks started to buy shares to stabilise the stock market, causing share prices to recover.

October 28, 1929: Share prices again fell sharply. Banks did not step in to support the stock market.

October 29, 1929: Over 16 million shares were sold in a day, causing prices to plummet. $10,000 million was lost by investors in a single day’s trading, leaving thousands bankrupted (e.g. investors; banks who had loaned money).

Question 20

How many shares were sold on October 29, 1929?

Answer 20

16 million shares

Question 21

How much money was lost in shares on October 29, 1929?

Answer 21

$10,000 million